New York State Bar Association
One Elk Street
Albany, N.Y. 12207
Business Law Section
Committee on Securities Regulation
April 7, 2003
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
E-mail address: firstname.lastname@example.org
Attention: Jonathan G. Katz, Secretary
Re: File No. S7-45-2
Implementation of Standards of Professional Conduct for Attorneys
Release No. 33-8186
Ladies and Gentlemen:
The Committee on Securities Regulation of the Business Law Section of the New York State Bar Association appreciates the Commission's invitation in Release No. 33-8186 issued by the Commission on January 29, 2003 (the "Release") to comment on proposed rules (the "Proposed Rules") to implement § 307 of the Sarbanes-Oxley Act of 2002 (the "Act").
The Committee on Securities Regulation is composed of members of the New York Bar, a principal part of whose practice is in the field of securities regulation. The Section includes lawyers in private practice and in corporation law departments. A draft of this letter was circulated for comment among members of the Committee, and the views expressed in this letter are generally consistent with those of a majority of the members who reviewed and commented on the letter in draft form. The views set forth in this letter, however, are those of the Committee and do not necessarily reflect the views of the organizations with which its members are associated or the New York State Bar Association.
The Committee appreciates the Commission's careful consideration of the comments it received with respect to its initial proposal to implement § 307 of the Act and the Commission's decision to repropose and to defer final action with respect to the attorney withdrawal and Commission notification provisions. The Commission's decision to move carefully and deliberately with respect to these sensitive and important matters is surely the correct one.
Members of the Committee continue to believe that adoption by the Commission of either of its proposals on mandatory withdrawal and notification would fundamentally alter the relationship between registrants and attorneys in ways that are unambiguously negative for investors and, correspondingly, for compliance by registrants with the laws and regulations the Commission enforces for the functioning of an orderly and honest securities market.
We elaborate below on the following comments:
- The Commission's up-the-ladder reporting requirements alone constitute a substantial expansion of the Commission's regulation of the conduct of attorneys. Given the substantial body of professional opinion that foresees serious adverse consequences from the proposed requirement of mandatory attorney withdrawal and Commission notification, the Commission should not undertake this additional rule-making without having had the opportunity to evaluate developing practice under the new up-the-ladder reporting rules.
- The Commission's alternative proposal would have substantively the same effect as the Commission's initial proposal and raises most of the troubling issues that rendered that proposal counterproductive for the investor community.
- Adoption of an attorney withdrawal and issuer notification proposal, in any form, will adversely impact the economic and other incentives that have caused the engagements of outside law firms to be structured in ways that, up until now, have had powerful positive effects on the accuracy of corporate disclosure.
- A client's, and indeed a democratic society's, expectations of the role and conduct of attorneys is very different from those applicable to public accountants. The Commission would make a grave error if it attempted to graft public accountants' duties onto the legal profession.
- Although any reporting out obligation on the part of issuers or attorneys would be wrong, if the Commission nevertheless determines to adopt one it would be important to avoid requiring a report to be issued unless the circumstances indicated that there was an underlying substantive problem. We support the suggestion that, if a committee of independent directors determines either that the withdrawing attorney acted unreasonably or that the issuer responded appropriately or has a "colorable" defense, no public disclosure should be required.
1. The Commission should review developing practice under its up-the-ladder reporting rules before deciding whether it is necessary to implement a mandatory withdrawal and notification requirement.
Putting aside for a moment the substantive issues addressed below, we believe that if the Commission were to adopt a withdrawal and notification provision at this juncture, it would be making a grave error. It is clear that Congress did not mandate in § 307 of the Act that the Commission implement any form of noisy withdrawal and, indeed, considered that the lawyer's duty ended when the lawyer reported the evidence to the Board of Directors.1 The Commission's up-the-ladder reporting procedure as adopted, without more, constitutes the most comprehensive and significant action taken by the Commission to regulate the conduct of attorneys appearing and practicing before it at any time in its nearly 70-year history. Whatever the Commission's beliefs may be about the substantive merit of further changes to its core rules governing lawyer conduct, in our view it would be inappropriate to overlay a second set of new fundamental obligations upon the Bar, particularly when Congress has not required that it do so, without waiting to judge the efficacy of the first set of obligations.
We submit that the Commission should allow time to monitor and review practice as it develops under the final up-the-ladder reporting rules as part of its process to determine whether any form of mandatory reporting out should be required. The volume of comments received by the Commission with respect to its proposed up-the-ladder rules, the Commission's substantial modifications to its initial up-the-ladder proposal and the volume of comments the Commission is receiving even now on these rules is a strong indication that the Commission may yet decide to fine tune them, both before and after they become effective. The Commission should not deprive itself of the ability to assess the effectiveness of its up-the-ladder rules in isolation, if for no other reason than to determine if future substantial modifications are called for.
Reporting up rules and reporting out rules each constitute significant regulations. The Commission should not make the error of assuming that these are blocks that build upon each other. To the contrary, we believe reporting out obligations would absolutely be at cross purposes with reporting up obligations.
2. The Commission's alternative attorney withdrawal and Commission notification proposal is substantively the same as the Commission's initial proposal and raises the same troubling issues raised by that proposal.
In our letter to the Commission of December 18, 2002 we commented at length on our view that the Commission's implementation of a noisy withdrawal requirement would undermine the stability of the attorney-client relationship, to the detriment of issuers and investors, by eliminating the "zone of privacy within which a client may more effectively exercise the full autonomy that the law and legal institutions allow."2 A noisy withdrawal requirement will undoubtedly have a chilling effect on attorney-client communications and on the willingness of issuers to seek and obtain effective legal advice at the time they need it the most.
In practice, the securities Bar has exerted a consistently effective force for compliance with the federal securities laws, rules and regulations. Although issuers have no obligation to discuss disclosure issues and questions with counsel, particularly when they are not engaged in offering securities registered under the Securities Act of 1933, they have often done so.3 We believe that imposition of mandatory attorney withdrawal and Commission notification rules would provide an unmistakable incentive to issuers and their controlling persons to avoid consulting with counsel on the very facts and circumstances that call for dispassionate and competent analysis, out of fear that counsel will have to report them to the Commission if they do not agree on the resulting disclosure.4 The Commission may gain from the communication to it of facts and circumstances discovered through happenstance, but investors will lose much more if issuers are fearful of seeking the counsel of the very professionals they now trust to advise them with respect to important and difficult decisions.
The Commission's alternative attorney withdrawal and Commission notification proposal undoubtedly represents a sincere effort by the Commission to reconcile reporting out obligations with an attorney's duty of confidentiality. We do not believe, however, that such an effort can be successful. The alternative proposal places nominally on the issuer the obligation to inform the Commission of the fact and the "circumstances" of the attorney's withdrawal, which could cause more harm than the original proposal in that the issuer would be virtually compelled to disclose the substance of confidential communications with the attorney, whereas the original proposal would have required a report only of the fact of the attorney's resignation for "professional considerations." The notice obligation, however, is non-discretionary - the result of a wholly mechanical process triggered by the attorney's notice to the issuer, which is itself mandatory under the circumstances the rules delineate. We do not believe that an attorney can act consistently with his or her confidentiality obligations where the attorney provides confidential advice that the attorney knows will cause a non-attorney to disclose the substance of confidential communications. Should this method prove a permissible way to circumvent the attorney-client privilege, there will undoubtedly be no end to the list of authorities that will seek to impose rules requiring attorneys appearing before them to issue disclosures to non-attorneys for forwarding to them. We believe that the attorney-client privilege is too essential to our legal system to permit it to be eviscerated by indirect as well as direct action.
Although the Commission can provide cover by adopting a rule that purports to preempt state rules of professional responsibility, thereby giving the attorney a defense to an allegation by the client of misconduct, it remains the case that any noisy withdrawal requirement would adversely affect not only attorney access to information but also the consultative function that attorneys have traditionally provided. The Commission should recognize that the desirable goal of investor protection will not be advanced by a rule that corrodes attorney-client trust and leads issuers to avoid consulting with legal counsel in circumstances where the advice of counsel could result in appropriate disclosure.
3. Mandatory attorney withdrawal rules will create powerful incentives for issuers and lawyers to structure engagements in ways counterproductive to the efficient production of accurate disclosure.
We believe that implementation of any form of mandatory attorney withdrawal rules would ultimately result in the restructuring of law firm engagements in ways that will detract from the ability of outside law firms to assist in the disclosure process. Although this factor is less relevant to the function of in-house counsel, we believe that outside counsel have historically performed a significant role in the efficient production of accurate corporate disclosure.
At the present time many issuers retain a single full-service outside law firm to represent them in most securities law matters. Typically, the principal outside firm will assist the issuer in its preparation of disclosure documents. This arrangement is beneficial to the efficient production of accurate disclosure because it enables specialists in securities law to canvass other attorneys in the law firm who have knowledge of facts, circumstances and applicable law from their other assignments for the issuer. When disparate practice groups within a single firm work on a single issuer's matters, the firm's securities law specialists are able to benefit from the resources of the entire law firm in the preparation of disclosure documents.
Issuers undertaking their initial public offerings will necessarily consult extensively with securities counsel to prepare accurate disclosure documents. However, it cannot be over-emphasized that for most issuers the preparation of disclosure documents is not their paramount reason for engaging outside law firms to represent them. Regulated entities may view regulatory counsel as their key legal relationship; issuers involved in litigation will be interested in hiring lawyers with litigation skills; companies with important intellectual property assets or real estate assets will have fundamental recurring legal issues of their own far from disclosure to investors; and so on.
Moreover, for most full-service law firms, the preparation and review of disclosure documentation is not their principal source of revenue, even from those of their clients who retain the firm to assist in disclosure preparation. To the contrary, litigation with third parties other than the Commission, regulatory compliance and transactional work that does not involve disclosure issues are all likely to overshadow the importance of routine disclosure preparation.
Even transactional representation involving securities law issues undertaken on behalf of an issuer will not necessarily involve "appearing and practicing before the Commission" under the rules. For example, mergers and acquisitions work on behalf of an acquiring company would involve appearing and practicing before the Commission only if the company makes a formal tender offer or issues securities in connection with the transaction or if the transaction requires the company to obtain a vote of its own stockholders or is otherwise of sufficient materiality to require it to file a disclosure document with the Commission. Even where transactional work implicates securities law issues and is undertaken on behalf of an issuer, an outside law firm may not necessarily advise on the securities law issues if other counsel, including internal counsel, are in place for the purpose of providing such advice. For example, a law firm may represent an issuer on acquisitions of other companies abroad, but a different law firm may represent the issuer on domestic disclosure matters, and in many of such cases only the second firm would be covered by the rules. Finally, work undertaken on behalf of underwriters, broker-dealers, institutional trustees and myriad other financial services participants other than "issuers" will not be covered by the rules, and, indeed, there would be no basis in the Act for attempting to do so.
Although many issuers receive assistance in preparation of their disclosure documents from their full service outside law firms, this will not necessarily continue in the future if outside law firms perceive that doing so would put their other relationships with the issuer at risk. At present issuers may retain their principal law firms because there is economic advantage in centralizing their legal engagements within a single law firm. However, because disclosure assistance may not be the principal function of the outside law firm, the manner in which it is carried out will be particularly sensitive to alteration in response to incentives.
The adoption of a noisy withdrawal requirement cannot help but factor into the calculus an issuer will use when deciding how to structure its engagements and a law firm will use in determining what engagements to accept from issuers, particularly since the Commission's position has been that the withdrawing attorney must withdraw from all matters in which the attorney is representing the issuer. A prudent issuer may decide that the potential withdrawal of its principal full-service law firm from a panoply of active litigation, regulatory, intellectual property and transactional matters would be so disruptive that it would be better to avoid any risk that the withdrawal of counsel would jeopardize its ability to secure proper representation on its most important legal matters.
The incentives from the law firm's perspective are in the same direction and are magnified enormously. Because most law firm representation of issuers does not involve appearing and practicing before the Commission, law firms have many engagements that do not require them to consider issues that might require a withdrawal of representation. Law firms may decide not to accept engagements that could require them to resign so that they may continue on other engagements that would not require possible resignation. A firm would be much more likely to accept an engagement involving covered activity if it did not put other engagements at risk by doing so.
The up-the-ladder reporting rules already adopted will require law firms to engage and organize themselves in a different manner from what is normal and customary for most corporate issuer clients. In order to be able to report "up the ladder" they will be required to determine and maintain records of exactly what the ladder consists of. By contrast, normal corporate representation does not require up-the-ladder reporting unless the firm was engaged by the chief legal officer; i.e., it usually involves reporting back to the officer of the company that engaged the firm, who may well not be a lawyer. Moreover, although the professional conduct rules speak in terms of the obligations of individual attorneys to determine whether to report up the ladder and/or noisily withdraw, law firms are responsible for the conduct of each of their attorneys and will seek to organize themselves to ensure that junior attorneys and attorneys without expertise on particular legal issues will consult with others inside the firm in order that the firm may make a collective decision on whether to report up the ladder and/or withdraw. The level of involvement of different people within the firm may be greater for engagements that involve appearing and practicing before the Commission as compared with other engagements, and there will be greater pressure on legal fees in such engagements. Law firms, without doubt, will need to determine at the outset of any engagement whether they will be appearing and practicing before the Commission.
Nevertheless, it is the potential loss of engagements caused by the implementation of mandatory withdrawal rules as opposed to the costs imposed by the up-the-ladder reporting rules that will be the key operative incentive. The up-the-ladder rules impose an incremental operational cost that we believe will result in a further, but relatively minor, disincentive to engage in covered practice, but the incentive to avoid the risk of mandatory withdrawal will have effects on practitioners in all firms and specialties. Outside attorneys whose specialty does not require appearing and practicing before the Commission will be careful to consider the implications of taking on any such representation, even incidentally. The upshot may be that cooperation between attorneys, particularly unaffiliated attorneys, may be adversely affected, particularly because an outside law firm that is not appearing and practicing before the Commission will have to consider the possibility that any information it communicates in confidentiality to a law firm that is appearing and practicing before the Commission will be disclosed to the public. There is little practical reason for an attorney representing an issuer on a litigation matter, for example, to review and comment on another attorney's description of that matter in a registration statement. The litigation attorney may not be trained in disclosure and may not have been retained by the issuer to review public disclosures about the litigation. Outside non-securities specialist attorneys cooperate in disclosure review today in part because there is no reason for them to decline to do so. It is unlikely that this courtesy will continue to be extended at the potential risk of an unrelated engagement. The result is that attorneys charged with responsibility of producing disclosure will lose valuable assistance. This is an inconvenience for attorneys, but the consequences for investors may be far greater.
The constituency that will lose the most through segregation of the function of appearance and practice before the Commission is the Commission itself in its role as guardian of the investing public. Should the implementation of mandatory withdrawal provisions lead issuers to retain exclusively in-house counsel for representation that involves appearing and practicing before the Commission, issuers may lose the benefit of valuable outside perspective and expertise. If issuers rely on a special purpose outside counsel to assist in the function, their disclosure may lose the benefits provided by a focused review undertaken by an active full-service firm. In either case issuers would have an incentive not to use those attorneys that they would normally rely upon for most of their important matters. Whatever incremental benefits the Commission believes could accrue to investors in the "rare" case in which a withdrawal would be required cannot possibly outweigh the detriment to investors caused by a decline in disclosure quality brought about by the effects of rational responses by issuers and law firms to the incentives the mandatory withdrawal requirement would create.
4. The role of the attorney is very different from the role of the public accountant. The Commission should not apply principles applicable to the conduct of public accountants to the conduct of the Bar.
Commentators and even Commissioners have expressed puzzlement at the reasons why attorney conduct is often different from conduct called for by the standards set for independent public accountants. This puzzlement has led to a level of frustration.
Accountants are retained by issuers in order to report to the public on the financial condition and results of operations of the issuer's entire enterprise and must be given access to personnel and documents of the entire enterprise in order to do so. They have a duty to be independent and to report directly to the shareholders, and issuers have no choice not to retain them. Attorneys are advocates that are not required to be independent, they report directly to their clients, and they have a duty to "zealously advocate" their client's interests within the confines of the law. Although some issuers do engage outside counsel to represent them principally on disclosure matters, outside lawyers are generally retained by issuers primarily to assist them on discrete projects that do not necessarily require them to ask the lawyers to examine facts material to the entire enterprise. In normal engagements, attorneys will have access only to those persons and documents that are necessary or useful for them to be able to advise on the matters on which they have been engaged. As a result, they do not necessarily have access to people and documents that would enable them to form a view on what facts are material for disclosure purposes. Attorneys also have different skills in different matters and are neither expected nor required to represent issuers on matters that are not within their expertise or do not relate to the purpose for which they have been engaged, and issuers will not pay their fees for work outside the scope of their engagement. Many skilled attorneys do not have expertise or training in the federal securities laws. Most importantly, although reporting issuers are required to engage independent accountants, there is no legal requirement that issuers engage attorneys to advise on disclosure documents, nor are there any "generally accepted" procedures that attorneys could follow that would satisfy their obligations to ascertain all of the material facts in cases where they may be retained for the purpose of representing the issuer on disclosure matters. Much of this work is a matter of judgment and experience.
Attorneys in engagements with a particular focus may nevertheless become aware incidentally of potentially illegal conduct in some other area but will not necessarily have the skill or the resources to pursue it if it is outside the scope of their engagement. In such an event they will not necessarily have the ability to report such matters directly to the personnel involved in the conduct or to ask to review relevant documents in order to investigate such matters, and their normal reaction in such circumstances would be to report such potentially illegal conduct "up-the-ladder" or to some other person within the issuer who is in a better position to deal with the issue in question, but not to form a definitive view themselves as to the facts or to judge the manner in which the issuer deals with the matter. For them to report such matters to a third party, as the Commission's noisy withdrawal rules would essentially require, would put them in a position of serious personal risk ― risk of liability to the issuer for defamation, risk of losing the issuer's confidence and thereby the original engagement they had with the issuer, and risk of being disciplined by state and local Bar associations for misconduct in breaching the attorney-client privilege.
To be clear, up-the-ladder reporting requirements are completely consistent with the obligations of the lawyer when serving as counsel for the issuer as an organization. Congress expressed in § 307 that the Commission should set out clear obligations in this regard. By contrast, "reporting out" obligations, however imposed, would impose upon lawyers an auditor's duty to inform the public of his or her judgment. This is the role of an auditor, not the role of an advocate.
Accountants are also viewed as providing a service that directly benefits the public. The ability of the client to call upon a lawyer to fill the roles of counselor and advocate are viewed, quite correctly, as a necessary prerequisite to the functioning of a vibrant legal system and the alloy in the shield for the underlying property rights of a vigorous economy, but their positive effects on society writ large depend on how well they perform the tasks that they undertake. The public is not the lawyer's client, but the public can benefit from the proper use of lawyers. Clients uniformly have a clear expectation that their attorneys are advisors and advocates, not enforcers.
Congress did not collapse auditing and lawyering in the Act. Congress did not impose or call for the imposition upon lawyers of independence requirements or law firm rotation. We believe the Commission should implement § 307 in the context of the provisions of the Act that demonstrate Congress' goal of empowering boards and their independent members. The lawyer can be the board's instrument. The lawyer should not be the board's policeman.
5. We support alternatives to requiring issuers to have a "Qualified Legal Compliance Committee" if they wish to be able to avoid any reporting out obligation, if such an obligation should ever be required.
Although, as stated above, we believe that the Commission should not adopt any form of "reporting out" obligation on the part of attorneys or issuers, we also wish to comment on the suggestion made in Section IIII(C)(2) of the Release that an issuer should be permitted not to disclose the withdrawal of an attorney under circumstances where a committee of independent directors has determined, based on legal advice of other counsel who was not involved in the matters underlying the reported material violation, either that the withdrawing attorney acted unreasonably or that the issuer has responded appropriately to the circumstances reported to it by the attorney. Indeed, we would even go beyond this proposal and suggest that the same result ought to apply in the event that the full Board of Directors makes the determination, as opposed to a committee of independent directors.
It is not clear to us that many companies will elect to form Qualified Legal Compliance Committees ("QLCCs"), whether or not the Commission adopts any form of a noisy withdrawal requirement. Although we think the idea of having committees in place to deal with ongoing legal and compliance matters as they arise is a good one, we do not believe that a QLCC meeting the exact requirements set forth in Section 205.2(k) of the Regulations is necessarily the best way to organize a committee for this purpose. For one thing, that section requires that the QLCC include at least one member of the issuer's audit committee, but the audit committee has such a significant burden already as a result of the new requirements of the Act that we fear that members of the audit committee will not readily wish to take on additional burdens. Secondly, a QLCC would have the responsibility to review and take a position on all legal violations that may be reported to it, however trivial the committee may feel they are, and this burden may also result in some members of the issuer's Board of Directors declining to serve on the committee. Companies that have a general counsel already expect the general counsel to perform this function. Finally, a QLCC as constituted according to the Regulations would be required to have the "authority and responsibility" to notify the Commission directly in the event that a majority of its members concludes that the issuer has failed in any material respect to implement an appropriate response that the committee has recommended. This will result in members of the QLCC being concerned about their own personal liability if they should disagree with a course of action that they are advised by others they must follow.
As a practical manner, the ability of the issuer to respond to different potential violations in different ways may well be important in practice, and even if the issuer has a QLCC it may determine to refer a particular report to another committee. The most important aspect of the suggestion in Section III(C)(2) of the Release is its recognition that there is no reason to require a report to be filed with the Commission or any public disclosure to be made to the effect that an attorney has resigned if the issuer has in fact corrected the alleged violation by implementing an appropriate response, even if the attorney who resigned disagrees with whether the response is appropriate. It is also important for a committee to be able to make an informed determination, based upon the advice of counsel that had not been involved in the events resulting in the material violation that was reported, to determine that the withdrawing counsel acted unreasonably in withdrawing. Similarly, it should be equally satisfactory for the committee to determine, based upon advice of counsel that was not involved in the violation, that the issuer has a "colorable" defense. In any event there will be little likelihood that greater harm would result from the process of obtaining a second opinion, as opposed to acting on the basis of the first opinion.
One of the grave dangers of reporting up and reporting out procedures, viewed in combination, is the fact that in the real world determinations regarding whether violations have occurred or are about to occur would have to made very quickly. Under the new rules, not only must the attorney report "forthwith" when the attorney discovers evidence of a material violation, but the underlying standards for determining whether there is evidence of a material violation are based upon not what the attorney actually believes but what "a prudent and competent attorney" would believe. Attorneys would naturally be reluctant to trust their own judgment on the credibility and probity of evidence if they are going to be subject to second guessing by a so-called "objective attorney" standard.
As a result, there is likely to be a tension between an attorney's efforts to comply with the rules, on the one hand, and a company's ability to make a proper determination of whether a violation has occurred, is occurring or is about to occur. The mere fact that the issuer retains other counsel for the purpose of investigating the facts underlying the report of a violation ought, in our view, to be a sufficient basis to avoid issuing a public report of any kind until the other attorney has completed the investigation and has reached a conclusion that the issuer has had a chance to consider at a responsible level and, if possible, to implement. In the real world, whether or not a violation has occurred is often a question that involves judgment and nuance rather than presenting a black and white issue, and different attorneys can often reach widely divergent conclusions as to the legal significance of any particular factual scenario.
To summarize, we feel that any reporting out obligation on the part of issuers or attorneys would be wrong, but if the Commission determines to adopt one it will be important that there be many different ways in which to avoid requiring a report to be issued if the underlying facts are not black and white. Therefore, we support the suggestion that a committee other than a QLCC ought to be able to make a responsible determination that the issuer should not be required to issue a public report under the circumstances envisaged.
* * * * * * * * * * * * *
We hope the Commission finds these comments helpful. We would be pleased to discuss them with the Staff and to work with the Staff on any revisions to the rules.
By Gerald S. Backman
Gerald S. Backman, Chairman
Securities Regulation Committee
Richard R. Howe, Chairman
Gerald S. Backman
Margaret A. Bancroft
Robert E. Buckholz, Jr.
Edward H. Cohen
Henry Q. Conley
Edward H. Fleischmann
Burton K. Gordon
Richard E. Gutman
Joseph D. Hansen
Michael J. Holliday
Guy P. Lander
Jeffrey W. Rubin
Joseph L Seiler
Hon. William H. Donaldson, Chairman
Hon. Paul S. Atkins, Commissioner
Hon. Roel C. Campos, Commissioner
Hon. Cynthia A. Glassman, Commissioner
Hon. Harvey J. Goldschmid, Commissioner
Giovanni P. Prezioso, General Counsel
Hon. Richard C. Shelby
Hon. Paul S. Sarbanes
Hon. John R. Edwards
Hon. Michael G. Oxley
Hon. Barney Frank
|1|| The Commission recognized in the adopting release that "the final rule responds fully to the mandate of Section 307." Senator Edwards, the principal sponsor of what became Section 307 of the Act, indicated no concept of "reporting out" in his remarks in the Congressional Record discussing the basic concept of Section 307. He said, ". . . when the evidence is reported within the company, we have not specified how a CEO or a general counsel should act to rectify the violation. That is because the truth is that the appropriate response to cure the problem will vary dramatically, depending on the circumstances. If the CEO can do a short investigation, for example, and figure out that no violation occurred, then the obligation stops there. But if there is a serious violation of the law, the appropriate response is clear: The CEO has to act promptly to remedy the violation. If he doesn't, the lawyer has to go to the board. It is that simple."
|2|| American Law Institute, Law Governing Lawyers, § 68 cmt. C, at 520 (2000).
|3|| The available evidence indicates that few of the issuers involved in the most prominent recent financial scandals appear to have consulted with securities lawyers to discuss the disclosures they were making in contemporaneous Exchange Act reports.
|4|| The timing requirements of the new up-the-ladder rules are also a cause for concern insofar as they require the attorney to report evidence of a material violation up the ladder "forthwith" (see § 205.3(b)), which may require the attorney to report the evidence before the attorney has had an opportunity to evaluate fully its probity and its credibility.